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Professional gold market ‘obsessed’ with tapering issues – GFMS

Thomson Reuters GFMS has just published Update 2 for its 2013 gold survey and it doesn’t hold out much comfort for the gold bulls, but is this analysis unduly pessimistic?

Lawrence Williams&nbsp|&nbsp23 January 2014&nbsp14:59

In Thomson Reuters GFMS’ 2013 Gold Survey – Update 2, released today, the specialist consultancy’s Rhona O’Connell – Head of Metals Research and Forecasting – notes that the professional market seems to be over-obsessed with issues around the Fed’s proposed tapering programme but that “private individuals in the traditional gold investing countries had no such qualms and as the price tumbled in the second quarter, hordes of these buyers appeared in the market.”

This has led, GFMS notes, to the centre of gravity in the physical market moving “dramatically eastwards during the middle of 2013 as professional investor disgorged metal, for it to be snapped up by rampant demand in Asia and the Middle East.” This resulted in the largest movement of gold, by value, in history

Thus there has been quite a dichotomy in the gold market over the past year with, as GFMS notes, professional investors continuing to lose interest in gold, but “grass roots” buyers maintaining their healthy appetite for the metal. Thus with the professionals calling the tune, although physical bar investment was at record levels, gold fell from grace overall and the price moved downwards throughout the year, reaching its low point in late December just ahead of the Christmas break.

Even so, looking ahead to the current year, GFMS does not see any real pick up in the gold price with U.S. tapering still a significant factor in the minds of professional gold traders and investors who have, GFMS avers, for the time being at least, lost interest in gold.

Significantly, although bar hoarding worldwide may have hit record levels in 2013, when coupled with the very significant offloading of gold out of the big gold ETFs amounting to some 880 tonnes, although this was comfortably exceeded by global hoarding of an estimated 1,338 tonnes, this overall amounted to a net 458 tonnes of combined hoarding/ETF offtake, while in 2012 the figures for ETF and global hoarding taken together, with ETF holdings growing at least during the first half of the year, came to 1,285 tonnes (net inflow of 278 tonnes and global hoarding of 1,007 tonnes). Thus, although not specifically stated, the GFMS analysis that this big fall in the combined net ETF/gold hoarding offtake will have been a significant factor in the gold price decline over the year – even though gold jewellery offtake is put at 48% higher in 2013 than in 2012.

However it does view 2014 as shaping up to be a year of consolidation for gold with the price drivers continuing to adjust from concerns over the health and stability of the global financial system and back towards physical fundamentals. However. In terms of the mining sector GFMS reckons that gold prices could enter oversold territory during 2014, putting some gold producers, at least temporarily, in the red with average all-in costs, excluding write downs, estimated around $1,200/oz in 2013 with price forecast of $1,233/oz in 2014.

While GFMS suggests that strong physical demand continuing throughout the current year should sustain an average gold price above $1,200, it does not see any real price growth either.

There is the suggestion that short covering may give the price a temporary fillip in the first quarter of the year – to perhaps as high as $1,330, but beyond this GFMS sees continuing lack of interest in the gold market by professional investors in the West. Thus the gold market has not regenerated the ‘sparkle’ seen from 2008 to 2011 – and is again not expected to do so this year.

“With investment activity muted, therefore, gold is likely to show a more traditionally seasonal pattern than has been the case in recent years. This points towards the possibility of brief tests of $1,000 should there be any further investor retreat in the second and quite possibly the third quarters of the year, but physical demand is expected easily to be robust enough to defend any test of this level and any such dips would be short lived.” reckons GFMS.

This kind of forecast is in line with that of many of the bank analysts but, in the writer’s view, which is down to more of a gut feeling than through any specific analysis of the figures involved, the GFMS forecast is perhaps too gloomy and seems to take little account of the noted gold flows to the East. One gets the impression that gold ETF outflows this year will, at the very least, be at a far lower level than in 2013 – indeed gold ETF holdings could possibly increase if low gold prices continue and are seen as at bargain basement levels. Should the Eastern demand continue at or near recent levels and the ETF outflows turn around, or diminish, then 2014 net ETF/hoarding figures, on which GFMS seems to base some of its depressed gold price arguments for the year past, could also move sharply upwards.

GFMS does note that the fundamentals point to a gold market more or less in balance during 2014 and this leads it to predict an expected price upturn in the final four months of the year. Overall it thus forecasts an average price of $1,225/ounce over the full year,13% below that of 2013. This is indeed O’Connell’s estimate of average 2014 gold price in the LBMA’s price forecasting competition this year.

Much though will depend on the continuation of Chinese demand at the kind of levels seen last year – and possibly on whether the Indian Government relaxes its stringent import restrictions on gold – which it may well do in an election year. Undoubtedly Chinese demand will fall off in the first two moths of the year for its Lunar New Year holiday period – but it is always a weak period and although, undoubtedly, if this happens again this year, headlines will scream ‘Chinese gold demand collapses’, it’s what happens in the following months which will be the key. (In 2013 net Chinese gold imports through Hong Kong over the first two months for example totalled only 81 tonnes as against an estimated average monthly figure over the full year of close on 100 tonnes.)

So watch out for China gold import figures, Indian government news on gold and ETF outflows or inflows. In combination, should they move gold’s way, they could make a huge difference to the gold market in 2014.